When the Federal Government Reinstated a 10% Excise Tax on Airline

question 8

Essay

When the Federal government reinstated a 10% excise tax on airline tickets, the industry wanted to pass on the full 10% ticket tax but was only able to boost fares by 4%.
(a) What can you conclude regarding the elasticity of demand for airline tickets?
(b) If you know that elasticity of demand is 2 and the elasticity of supply is 1, who bears the larger burden of the tax?
(c) Show the incidence of the tax graphically.

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Definitions:

Normal Distributions

A bell-shaped distribution that is symmetric about the mean, indicating that data near the mean are more frequent in occurrence than data far from the mean.

Standard Deviation

A measure of the dispersion or variability within a set of data points, representing how spread out the values are from the mean.

Z-Score

Scores for the standard normal distribution measured in standard deviation units.

Standard Normal Distribution

The standard normal distribution is a special case of the normal distribution with a mean of zero and a standard deviation of one, used in z-tests.